Big institutional investors account for 80 per cent of the half a trillion dollars foreigners have plowed into emerging market sovereign debt in the last few years, according to an analysis by International Monetary Fund economists.

Investors such as hedge funds and sovereign wealth funds held $768 billion in emerging market government bonds as of June 2013, the paper showed. Foreign central banks held at least $40 billion more. The makeup of a country’s investor base is important in gauging whether investors will stick around when times get tough or run for exit, pushing bond yields up and currencies down. Central banks and pension funds are seen as stable investors, while hedge funds can be changeable.

The paper found about half the foreign holdings of emerging market debt, worth nearly $500 billion, were accumulated during the three years from 2010, as emerging markets rebounded from the financial crisis more quickly than developed countries.

Many also regained investment-grade credit ratings, such as Colombia and Indonesia, burnishing their appeal in the eyes of yield-hungry investors flush with cheap cash.

“Rising foreign participation in government debt markets can help reduce borrowing costs and spread risks more broadly among investors, but it can also raise external funding risks for countries,” authors Serkan Arslanalp and Takahiro Tsuda wrote in a blog post. “The more you know your investors, the better you understand the potential risks and how to deal with them.”

Data prepared for the paper, “Tracking Global Demand for Emerging Market Sovereign Debt,” shows institutional investors held relatively steady during the second quarter of 2013, when jitters about the US Federal Reserve starting to unwind stimulus hit financial markets worldwide.

Overall, holdings of institutional investors fell less during the second quarter or 2013 than foreign debt holdings overall, a turnaround from earlier periods of outflows.

The 24 countries used in the research cover $9 trillion of outstanding government debt and more than $1 trillion of debt securities held by foreigners. Tests of how sensitive countries would be to a cold shoulder from foreign investors showed Egypt, Lithuania and Poland would likely be among the first to feel the pinch, followed by Argentina, Hungary, Mexico and Ukraine.

But countries with lower debt, lower financing needs, strong local banking systems and good liquidity buffers had a better chance of withstanding a reversal in investor sentiment, the authors said, pointing to the experience of Mexico and Poland, which suffered less in the emerging market sell-off of mid-2013 than many peers.